Construction Materials Prices Accellerate Sharply in February

Published: March 15, 2012

The cost of construction materials accelerated dramatically in February after moderating for several months, according to an analysis of producer price index figures released today by the Associated General Contractors of America. As a result, construction firms will be forced to pay more for key materials even as demand for construction remains weak, association officials noted.

“Prices for a wide range of construction inputs rose sharply in February, threatening to put contractors out of business and leave public projects underfunded unless materials can be ordered before prices jump further,” said Ken Simonson, the association’s chief economist. “Contractors had finally begun to cover the modest increases of the last few months but now many of them are facing increases they may not be able to afford, given the industry’s meager margins.”

Simonson noted that the price index for construction inputs — a weighted average of all materials used in construction plus items consumed by contractors, such as diesel fuel and tires on equipment — rose 0.9 percent in February, more than double the 0.4 percent rise in January. He contrasted that jump with the static-to-falling change in the price index for finished nonresidential buildings — a measure of contractors’ bids. Those indexes were unchanged in February for warehouse, school and office buildings and down 0.2 percent for industrial buildings.

Association officials said the acceleration in materials costs will put further pressure on hard hit construction firms that are competing fiercely for a limited amount of work. Making matters more difficult is that Washington has yet to pass long term infrastructure programs or set long term tax rates, making it hard for firms to predict how much they will earn or pay in taxes.

“With contractors getting squeezed by materials prices, it would certainly be helpful for Congress to enact long-term infrastructure and tax measures,” said Stephen E. Sandherr, the association’s chief executive officer. “Getting the House to pass the Senate-backed transportation bill, for example, would help a lot of firms struggling to survive.”